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Has Revenue Sharing Improved Competitive Balance in MLB?

First, a history lesson.  The only form of revenue sharing prior to 1996 was the sharing of gate receipts with visiting teams.  In the American Laegue, the visiting team received 20% of gate receipts, compared to just 5% in the National League.  In 1993, the total amount of money distributed under this method was around $20 million.  Fast forward to the era of collectively bargained revenue sharing.  Beginning with the 1997 season, under a collective bargaining agreement signed in December of 1996, revenue sharing was slowly phased in using three different plans.  It’s too much to go into here, but you can read my legal journal article if you’re interested in the specifics.

The end result was that by the 2000 season a plan called the Split Pool Plan was fully implemented.  For those interested in the math of it all, here it is:  it called for all clubs to contribute 20% of their Net Local Revenue (defined as a club’s local revenue less their actual stadium expenses) to the putative pool, with 75% of that pool being equally divided amongst all of the clubs.  The remaining 25% of the putative pool was then divided between all clubs whose Net Local Revenue fell below the arithmetic mean for all clubs’ Net Local Revenues in proportion to that club’s distance from the mean.  Basically, it meant that everyone got a little revenue sharing, but those on the bottom end of the revenue spectrum got even more, with those all the way at the bottom receiving the most.  By 2002, the total amount of revenue distributed between clubs was around $169 million.  Remember that under the prior method of revenue sharing only around $20 million was distributed between clubs.

One of the most outspoken critics of the system was Yankees owner, George Steinbrenner.  In an article by Barry Bloom of MLB.com back in August of 2002, Steinbrenner expressed his concern that small market teams weren’t using the revenue sharing dollars they received in an appropriate manner.  Under the collective bargaining agreement that governed at that time, there was little direction on how revenue sharing distributions were to be spent.  Steinbrenner was frustrated that some teams seemed to be using their disbursements to offset losses incurred by owners.  He pointed out that owners of small market teams were businessmen who understood what they’re getting themselves into when they bought a small market team.  He thought they should be prepared to subsidize their team until it generated a profit instead of depending on revenue sharing dollars to offset losses.  Steinbrenner characterized each club as a business that should be run as such by the businessmen buying the clubs.  However, this view fails to factor in the fact that MLB as whole is a business, and that revenue sharing allows this one large business to subsidize weaker departments (i.e., low revenue clubs).  This forces clubs like the Yankees to share in the wealth they are blessed with as a product of their location in New York and their resulting substantial local media deals.In a USA Today article by Bob Nightengale in January 2001, Scott Boras (yes, he’s becoming a regular part of conversation here) also spoke out against revenue sharing.  He thought it punished successful teams while rewarding those whose owners made no effort.  He put forth several suggestions for alternatives, including compensation for “homegrown” players and incentive-based rewards for teams.  I’ll discuss these in a later post.

The complaints didn’t go unnoticed, and there were some tweaks to revenue sharing in the collective bargaining agreement signed in September 2002.  Revenue sharing under this agreement was most like the Straight Pool Plan of the previous agreement.  The new agreement’s Base Plan called for 34% of each club’s Net Local Revenue (again, defined as a club’s local revenue minus their actual stadium expense) to be contributed to a central pool that was then equally divided between all 30 clubs.  There was also a new Central Fund component that acted like a split-pool.  The Central Fund is MLB’s “war chest” and includes monies from MLB’s national television broadcasts and merchandising rights.  This new Central Fund component distributed to clubs who were “payees” under revenue sharing based on their distance from the average Net Local Revenue using revenue averages from the previous three years.  Monies are then deducted from distributions that would have been made to clubs that were “payors” into revenue sharing.  If you’re interested in the math of it all, see my legal journal article.

In addition, a new fund called the Commissioner’s Discretionary Fund was created under the new agreement which also allowed for more funds to be made available to low revenue clubs.  Under the agreement, the Commissioner’s Discretionary Fund was to be funded each revenue sharing year with $10 million from the Central Fund.  Low revenue clubs could request a distribution from this fund by writing to the Commissioner and detailing how the money would be spent and how it would improve the team’s on-field performance.  An interesting aspect is that although the use of this fund looked on the surface to be at the discretion of the commissioner, he was required to notify and discuss with the MLBPA his decision to grant or not grant such a request from a club.  Any funds not distributed from the fund at the end of the revenue sharing year were to be distributed equally amongst all 30 clubs.  For a more detailed look at how the Central Fund component or Commissioner’s Discretionary Fund works, I again point you to my legal journal article.  (I know, plugging my article is getting old.  Believe me though, you didn’t want me to go into all of it all here.)

By far, the biggest complaint about revenue sharing under this plan was the disincentive for lower revenue clubs to improve.  The supposed rationale behind this disincentive was that if the lower revenue club improved on the field, more fans would come to games, and in turn the club’s revenue would increase, and they would lose the hefty sum they would otherwise receive from revenue sharing.  A related problem is that higher revenue teams have disincentives to spend their money on baseball, with owners choosing instead to spend their money on other business pursuits. Red Sox owner, John Henry (whose team had one of the highest payrolls during the operation of the agreement that became effective in 2002) is one of the owners who has addressed the problems with the revenue sharing plan. While he applauds the overall improvement in baseball, he notes that as with all taxes, there is a limit at which effort and investment is discouraged.

Another often heard complaint is that some clubs receive more from revenue sharing than they spend on payroll.  This is by far my biggest problem with the system.  For example, in 2005, the Florida Marlins cut their payroll by more than 75% to a league-leading low of $14,998,500, more than $20 million below the next highest payroll. Their cut of revenue sharing amounted to approximately $31 million, leaving them with a surplus of roughly $16 million.  Such numbers make it less than surprising that owners of high revenue teams were calling for stricter controls and accounting for the way revenue sharing money is spent.  The easy solution would have been to add a requirement that clubs maintain a payroll at least equal to the revenue sharing dollars received.  However, that is not how the problem has been handled. 

The agreement that became effective in 2002 added a provision, not present in the previous agreement, that stated that any revenue sharing receipts should be used by a club to “improve its performance on the field.”  There was also a requirement that spending reports be submitted, and authority was given to the Commissioner to penalize clubs misusing funds. Unfortunately, many believed that section was without force because there was no requirement as to how detailed the spending reports must be and no team had ever faced penalties under that section for misuse of funds.   The real loophole is touted to be that funds can be used for any number of things deemed to directly or indirectly relate to on-field performance, including spending on a club’s farm system or scouting.  Some even speculate that teams like the Marlins use revenue sharing funds to compensate for past overspending. It comes as no surprise that George Steinbrenner, the owner of the high revenue Yankees, is frequently cited with quotations such as, “I’d like to see everybody competing, but we’re not a socialist state.”  

However, I must again point out that baseball as a whole can be viewed as a business, and revenue sharing as a system of subsidizing weaker departments.  Just as I said in my previous article on Scott Boras, the problem is circular: in order to generate revenue, a club must be good enough that fans pay for tickets and apparel, but the club cannot be so dominating that games become boring.  Thus, the ultimate goal is to be the best by a slight margin, which means it is in a club’s best interest that the other clubs in the league are nearly equal matches.  All of this theory and strategy is neatly packaged with the frequent reference to the need for “competitive balance” in professional sports.  

As for the new collective bargaining agreement for the 2007-2011 seasons,  some positive changes were made to the revenue sharing portion of the agreement.  One of the biggest changes is in terms of the marginal tax rate that results under the revenue sharing arrangement.  Basically, a marginal tax rate is how much a club must pay in revenue sharing for each dollar of additional revenue earned.  Under the last agreement, higher-revenue clubs ended up with a marginal tax rate of 40% while lower-revenue clubs had a marginal tax rate of 48%.  Obviously, this created a lot of disincentive for lower-revenue teams to earn more money.  The new agreement attempts to resolve this issue by calling for all clubs to have a marginal tax rate of 31%.  This lower marginal tax rate means less money will be coming into revenue sharing, so the new agreement has a greater percentage of monies being pulled from split-pool/Central Fund component.  

The new split-pool provision is still based on the same basic idea as before.  However, instead of higher-revenue clubs having their share re-evaluated every year using the mathematical formulas of the prior agreement, they will contribute at a fixed percentage under the new agreement (barring a change in their economic situation like getting a new stadium).  This means that local revenue no longer figures into the equation.  Thus, the disincentive for higher-revenue clubs to grow their revenue is gone. 

I like these new aspects of the collective bargaining agreement because they address some of the disincentives inherent under the old agreement.  Is the system perfect?  No.  Could more improvements be made?  Certainly.  But considering revenue sharing has only been around in this form for the past dozen years or so, I think it’s a positive sign that the agreement has changed each time to better address the inequities in the system.

Is Scott Boras the Most Influential Man in Baseball?

Though it pains me to ask, I often wonder if Scott Boras is the most influential man in baseball.  Not just today, but in the past couple of decades.  Players like Alex Rodriquez have him to thank for their unprecedented, multi-million, multi-year contracts.  Use the search terms “Scott Boras is Satan” on Yahoo! or Google and you’ll find a host of baseball fans equating Boras with the man down under.  If he’s not the most influential man in baseball, he certainly might be the most hated. 

As a fan, I’ve spent the past decade or so hating Scott Boras myself.  I blamed everything that was wrong with the game on him and the players’ union.  In reality, the pendulum has simply swung from one extreme to the other. 

Let me begin with a history lesson.  In the beginning, the owners literally owned the players, in every literal sense of the term.  Owners could unilaterally decide when to trade or sign a player and how much to raise his salary (subject to very little limitation).  The reserve clause, in its inaugural form, allowed clubs to reserve only five players.  However, it wasn’t long before the reserve clause was an integral part of every player contract.  Owners convinced players that the reserve clause was essential to preserve what’s been called “competitive balance” in baseball.  The idea of competitive balance was best stated by sports economist Simon Rottenberg, who said, “But in baseball no team can be successful unless its competitors also survive and prosper sufficiently so that the differences sin the quality of play among teams is not ‘too great’.”  In fact, as late as the 1950s, baseball players testified in Congressional hearings that the reserve clause was vital to the preservation of baseball.  And it wasn’t just any average player testifying, it was players like Ted Williams and Stan Musial.  The reserve clause, by its very nature, depressed player salaries, however.  Thus, as you can imagine, it was only a matter of time before the players would become discontent with the system.

Things came to a head in 1970 when Curt Flood challenged the reserve clause after being traded and refusing to report.  There were cases before that, but I won’t belabor the point here (you can read my legal journal article for more detail).  Unfortunately, Curt Flood lost his case and the reserve clause remained intact until Andy Messersmith and Dave McNally asserted they had achieved free agency for the 1976 season.  Basically, because they never signed their contracts for the prior season, they asserted they were no longer subject to the reserve clause at the conclusion of the 1975 season.  The case proceeded to arbitration within MLB instead of to the Supreme Court as Flood’s case had.  The interesting thing to note is that the MLB arbitrator at the time, Peter Seitz, had previously represented NBA player Rick Barry in his successful efforts to strike down that league’s identical reserve clause.  Seitz urged the players and owners to negotiate with one another to no avail.  Eventually Seitz ruled that Messersmith and McNally were indeed free agents and the business of baseball (and the game) was changed forever. 

Fast forward to the present where Scott Boras represents free agents and negotiates for them multi-million dollar, often record-breaking, contracts.  As fans, we hate him because at one point or another he’s represented someone on our team who ended up playing elsewhere because Boras demanded more money than our team could afford to pay to keep the player.  We blame him for the inflated salaries in baseball and for making the game about money and not about playing out of team loyalty or for love of the game.  Former player and current baseball commentator, Rob Dibble, has said it before and I’ll say it again: “For Love of the Game” was just a movie.  Yes, there are guys that seem to be more genuine and play for love of the game and not for money.  For the Braves, these have been players like Chipper Jones and John Smoltz, who have given hometown discounts to the Braves in the past to facilitate their resigning. 

But in the end, we as fans need to realize that baseball players have a far more finite career than the average person, so it makes some sense that they make a lot more money than we do.  When their career ends, either due to an injury or retirement, their earning capacity out in the real world may be very small.  Sure, some of them go on to coaching and broadcasting careers, but that’s only a small percentage of the guys who have played the game.  For those who retire young, they may not have any marketable skills out in the real world and may not have amassed very much during their playing years.  For others, they began the game at such a young age that they lacked the ability to manage their money wisely (although I hear baseball has made strides in this area by providing education and counseling).  There are a whole host of reasons why a baseball player would want to seek to maximize his earnings during his playing years, just like any other average person does in his career.  Instead, we see the multi-million dollar contracts or we lose our favorite player to another team because our team couldn’t afford him and we have to find someone to blame.  We blame the player, the union…and we blame Scott Boras.

Though my gut feeling is to dislike the guy, I have to admit that he’s simply doing his job.  He’s supposed to be a zealous advocate for his client and his job is get his client the deal the client wants.  If the client wants the most money he can get, Boras is the man for the job.  He’s a sharp negotiator and great at his job.  You really can’t blame him for that.  Instead, blame the owners who negotiate with him.  If no one would pay the big bucks, Boras wouldn’t be the infamous character he is.  If the owners really thought he was a detriment to the game, they would all refuse to negotiate with him.  Instead, they fork over the big bucks to one of his clients because they believe that player can make them, the owner, more cash.  I guarantee you that in the long run the owner only spends what he thinks he’ll get back in revenue from increased ticket sales, advertising, apparel, etc. 

The whole system is unbalanced and sometimes simply unfair.  But it’s the business of baseball as a whole that is to blame, not simply Scott Boras.  As I will explore in upcoming articles, and as I did explore in my legal journal article, baseball as a business needs to change.  In fact, if you’ll read my full-length article, you’ll see that Boras actually has some interesting ideas that clearly show his regard for the game.

So, is Scott Boras the most influential man in baseball?  Baseball America named him the most influential non-player in baseball just over a year ago.  Is he the most influential man in baseball ever?  I don’t think so.  This decade?  Last decade?  Some would certainly say so.  Is he also the most hated man in baseball?  For many, he is.  Love him or hate him, he certainly has shaped the modern era of baseball.  For that reason, I’ll be dedicating an entire chapter of my book to what I’ll call “The Scott Boras Era.”

Welcome to The Baseball EconoMiss!

I’m thrilled to have a new spot on MVN where I can share my thoughts on the economics of baseball.  My journey into baseball economics began with a Taxation seminar I took during law school.  Not knowing much about the IRS other than how to file my own tax return, I came up with the brilliant idea that I could do my seminar paper on internal taxation in baseball (revenue sharing and the competitive balance tax to be exact).  Needless to say, I was the only student in that class who presented a paper that didn’t once mention the IRS.  Credit goes to Professor Richardson for allowing me leeway to write on such an unusual topic for his seminar.

The paper that emerged as a product of that seminar was one I had worked too hard on to simply take my “A” grade and move on with my life.  So, I started shopping it around to legal journals.  The University of Denver Sports and Entertainment Law Journal featured my article in their Spring 2007 journal much to my excitement.  Since then, I’ve written on various issues in baseball economics on MVN’s Chop ‘n Change amidst my regular musings on the Braves. 

Over the past year, I’ve received many emails about my thoughts on baseball economics.  As I’ve studied the subject further, I have developed a passion for the topic which has led me to begin the process of writing a book.  Like my legal journal article, I plan to call this book “Can Money Buy the Postseason in Major League Baseball?” and will focus on the topics in myoriginal article along with a whole host of new ideas and opinions I have.  I’d like to use this site to get feedback on my various ideas and opinions, so please feel free to speak up!